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Friday, June 18, 2004

What Would An Economic Historian Write Looking Back At Us?

Starting in the eighties the civil service bureaucracies began making small changes in the measurement and accounting of basic economic gauges for inflation, productivity, etc. In the seventies the government and the Federal Reserve had been openly caught adulterating the CPI numbers in order to reflect unrealistic official numbers for inflation. Despite this cautionary tale, the public and elites of the late twentieth century America continued to make policy choices and decisions based on these biased numbers.

The common man knew no better and all persons amongst the sociopolitical elites found it to their advantage to continue the charade. Among other benefits it mitigated social unrest because entrenched economic interests found that they could continue to drive real wages in real terms down while lying to the public and telling them that their wages were only constant or growing slowly in absolute dollar terms. It reached ridiculous heights when the man spearheading this movement, the central banker Alan Greenspan, first advocated taxing public pension benefits and then later amazingly pushed the "chain-weighted" inflation gauge which suggested an even lower increase in inflation than the already suspect CPI and PPI numbers. The motivation for such policy perversions was that they justified low year over year growth in entitlement spending and masked the need for reform in the social insurance system.

The greatest puzzle was why economists failed to sound the alarm over the growing national debt, the current accounts or 'trade' deficit, and the increase in the period of "joblessness" in the "recoveries" from each business cycle. Beginning in the late eighties economic recoveries from each business cycle began to be accompanied by a period where official figures had improved but actual conditions in the economy as reflected by actual hiring by domestic businesses remained stangant for quite some time. Where jobs were created economic data conclusively showed that most of these jobs were not of equal pay or benefits with the career prospects enjoyed by previous generations.

The culprit in all of this was the 'free trade regimen'. Far from actually being deregulated trade, the 'free trade' ideology actually contained many subsidies, government interventions, and marketshare price fixing schemes. Everything from airlines to agricultural produce to manufactured goods to fossil fuel exports was regulated in such a way as to distort natural market efficiencies. However this regime dared call itself "free trade".

The net result of this government intervention was to spawn a lobby guild of special interests of economic and social elites pressuring for public policy implementation favoring their organizations. The corporation became the vehicle for the exportation of a capital flight to areas of lower fixed costs of labor and then the importation of the goods through affiliates and holding companies to the domestic markets where high prices could be charged for them. The consequence of this process was the increased income inequality between the monied interests of the rentiers and the income of the laborers or employees of such incorporated companies.

This became the often known phrase called cost cutting and while in previous ages executive managers had risen to the top by expanding marketshare or bringing to market innovative product the new manager was exemplified by his ability to transfer production overseas. This process occurred widely and was a key element in the surging corporate profits, profits fattened by systemic tax evasion encouraged by a broken taxation system. Despite the widespread fact of this activity, government statistics were produced that claimed that only a few percentage points of all jobs lost were reallocated overseas.

This sleight of hand was created an intentional obtuseness on the part of a civil servant bureaucracy that had been pressured into putting into place people who accepted assumptions that made the public policies look good by using bad assumptions. Among other bizarre deeds the government agencies for instance counted as offshored only jobs with a direct one to one transfer reallocation overseas and did not count jobs cut during a business contraction and then having their production shifted overseas during the next expansion. Other tricks included intracompany transfers that took parts or even entire product lines made overseas and repackaged them to be counted as domestic production. Of course the productivity numbers soared since there were no accompanying domestic workers added to increase that production. This slack in the labor market pressure then led to lowered hiring and the new service jobs that were added typically on each turnover of the economic cycles of the nation produced employment with lower and lower median compensation.

The most profound mystery of course as has been stated why did mainstream economists miss this story as it unfolded under their noses. Part of the explanation is due to the fact that economists had by the turn of the century become divided into two groups: academic and corporate. The corporate economists were paid by financial groups and institutions in order to analyze and forecast conditions to maximize the profit of their employer. As such they had neither the motivation or dedication to study the anomalies in the official numbers or investigate the underlying causes. The academic economists were far removed from any actual situation and took the official statistics as givens in their theoretical and analytical models. Living in situations and environments that gave them little personal experience with actual business and financial interactions they had little trouble rationalizing deviations from their ideal mathematical formulas. They failed to see the big picture and continued espousing their rather unreal theories.

The most egregious example of such a collective academic delusion was the so-called 'miracle of productivity'. As it turned out information technology had increased company efficiencies. However the ridiculous increases in the official statistics for productivity masked another trend. While information technology did contribute to company management of labor and capital, the real underlying story was that of capital flight. By building assets in locations of lower costs and then importing the products and services through intracompany transfers, the companies were able to increase their production output without increasing domestic hiring. As a result the productivity numbers soared all out of proportion to the actual aggregate microeconomic impact of the efficiencies of information technology. Despite this the economists of the day without any empirical basis argued that the information revolution was indeed responsible for the increase in productivity and not "cost-cutting".

Mechanization had been going on for quite some time since the beginning of the Industrial revolution. Every age had had its technological revolution. First the steam engine, then the cotton gin, then the internal combustion engine, then electricity, then electronics, then robotics, then the information technology revolution. Never had these progressive stages in the Industrial Revolution created the kind of abnormally high productivity numbers that were used as justification for the economic changes happening. What had been underestimated was that with the high inflationary costs of the seventies many companies had begun relocating production facilities overseas. The process was to continue through the eighties and later with the Democratic Administration of President Clinton.

Progressively the periods of "jobless" recoveries grew worse and worse, and the generation of new jobs filled with more low paying jobs not withstanding the temporary boom of the Internet Bubble, and the wages of the median laborer declined in terms of real purchasing power.

All the while the public complained here and there of declining opportunities, increased consumer debt, the need for two-income households when before one had sufficed, increased college education debt, etc. but overall they complacently accepted in the end the situation. This must have justified in the civil servants' eyes the manipulations being undertaken not in the name of deception but of social stability and working within the system. However due to outside political forces and the lobbying pressure of the monied interests who benefited from this scheme there came about a total lack of political will in order to challenge this situation. By the turn of the twentieth century the political contests had become completely dependent on large monetary flows with the 2004 Presidential election alone costing over half a billion dollars (currently Bush has raised over 200 million, Kerry has raised close to 150 million, and both intend to accept about 75 million each in public funding - that is 500 million for anyone who's counting).

Alan Greenspan was not some demon who attempted to defraud the American people. He probably felt himself to be a moral and pragmatic man. There is evidence that several times he counseled various Adminstrations on more prudent courses. In the end however by attempting to perform "damage control" and mitigate the consequences of bad public policy and elite greed he ended up becoming an enabler of otherwise indefensible policies of debt and asset stripping. His justification was probably that of maintaining public confidence while changes were made behind the scenes to address the problems.

He probably came closest to this long term goal when at the close of the nineties a temporary return of fiscal austerity had reformed government spending relative to economic growth. However this period was fleeting and as fiscal imprudence became systemic after the turn of the century, he came to approve of a regimen of extraordinarily loose monetary policy that resulted in the return of stagflation to the economy. This destroyed the final opportunity for the American people in order to put their house in order and avoid the economic and political crisis that would bring an end to the Third Republic and bring about the beginning of the Second Civil War.